Thursday, December 18, 2008

I use a method of cash management that I've cooked up over several years of trial and error. It was inspired by a great book I found referenced in the footnotes of a terrible Robert Kiyosaki book (that said, I haven't read a good Kiyosaki book...) called, The Richest Man in Babylon by G.S. Clason. In that book is described a method of personal financial management that is very simple: take your entire income, allocate 70% of it to "living," 20% to paying off debts, and the remaining 10% is directed to investments that are "inviolate" - you never cash them out or spend that money.

I ran with the basic system for quite a while and it worked wonders for me. My consumption came under control, my debts began to shrink and my net worth steadily increased. Little by little I began personalizing the system though. I had questions about what to do with "left over" amounts - should one keep separate ledgers for each of the three categories and roll over remaining balances in each when the next pay day rolls around? What about the investments? Clason preached reinvesting all interest and dividends and only tapping that income stream when one is too old to work - what if one doesn't live that long? Why not tap the income now while leaving the principal alone?

Little by little, these questions led to the development of my hybrid Richest Man in Babylon personal finance management method (I haven't come up with a snappy name for it yet). It's a bit difficult to explain quickly, which sometimes frustrates me when I'm trying to explain it to people. I was thinking about that today when the idea occurred to me to flow chart my method.

So, here it is:

As you can see, at the core of the method is Clason's idea, the three categories broken down by his recommended percentages. The investment and debt categories are obvious; "living" encompasses everything you do in day-to-day life - eat, go to the movies, drive your car, etc., and all of the related expenditures. Clason's prescriptions really did end at this point, however, so I added some features to tie up what I saw as loose ends. The result is something that I believe can push itself past the point of requiring inputs (new capital) and can continue to grow on its own, barring human error.

So, the flowchart explained...

It all begins on the left with wages, money from blogging, "windfalls" (found money, lottery winnings, legal settlements, etc.), which are the "inputs" into the system from outside sources (not cash generated within the system loop itself - more on that later). Initially, the system will not run without regular, steady inputs (sorry, you've still got to go to work for a while!). Together they enter the system as "income."

Income then gets divided into the three categories already mentioned.

When it comes to the living allocation, after using Clason's original method for a few months, I found myself at a point where I had cash left over from a previous pay period in this category when the next pay period rolled around. At first it seemed great that I could just roll leftover cash into the category in the new pay period, but I noticed "boom and bust" cycles developing in my spending habits - when this category swelled, I started living it up, and eventually I would find myself reduced back down to just the 70% of my latest pay period. This is fine in one sense because I had created no new debts, but I didn't like being able to have fun one week and then be "in the black" but stuck at home anyway in the next.

That's when I came up with a notion of creating my own "paychecks" out of remaining balances from this category. My idea was to shuttle remainders off to a money market account if a remaining balance existed in the living category each pay period. Then, in between normal pay periods, I would divide the balance of the money market account by 26 - the number of pay periods I have per year currently - and draw the resulting amount, which then gets sent back to the income stage of my cash flow process and allocated among the three categories. The result is that irregular periods of plenty get spread out over one year's time rather than feeding boom and bust cycles, which have been all but eliminated from my financial life by this, and my debt and investment activities get a small boost since a percentage of these money market account withdrawals is allocated to them. Additionally, if something unexpected comes up that would exceed the cash in the living category - car repair, Christmas gifts, a new electric fireplace for your living room (yeah, I want one) - this account can be raided to provide for such things. This account is, after all, a pool of money that exists because of and for deferred consumption (but don't use that as an excuse to constantly raid the account!).

In the debt category, the only question I've ever had is, "what does one do with this category when there is no debt to pay off?" One couple in Clason's book who wrote about their experiences using his method desribed reallocating their income into just living and investing, at 80% and 20% respectively. This idea makes sense given Clason's admonitions to never touch the principal nor the interest and dividends of one's investments until old age, but for the way I treat that category (more on that in a moment), it made no sense at all - it gives one an increased standard of living from wages, but what about investing more while simultaneously having more money for living and potentially working less now? (Not to mention that one's wages might be stagnant for an extended period of time, meaning no increasing standard of living in the present). Instead, my plan is to divert the full debt category percentage into investments, achieving a 70% living and 30% investment cash flow allocation split, which will slowly increase the actual amount of the living category over time, as I'll now explain.

I like investing for income. I understand and appreciate compounding, and I know the advantage and benefits of pursuing capital appreciation; as such, I have accounts where that goes on, namely my IRA account that I have through work. Outside of that though, I prefer to pursue passive income investments that pay me now. My reasoning for this is rather simple: though the long term gains of such investing may be smaller relative to longer term, non-income oriented investing such as growth investing (and this is frequently the case), I am alive now, I may not be tomorrow, and I can boost my income and standard of living now by pursuing such investments whereas the other type offers a payoff at a point in time in which I may not be here anyway. Plus, pursued regularly and systematically, passive income investing can within one's lifetime reach a level where it continues to grow on its own even as it throws off more income than what is required to sustain one's day to day living.

So that's how I arrived at the last box in the chart, my brokerage account box where 10% of all of my income goes. I draw the interest and dividends generated by my investments from my various brokerage accounts and "send" them back to the income stage of my method. Thus, 70% of my passive income supports my daily living, 20% takes care of debts (if any), and 10% goes right back into my passive income investments (or 30% if there are no debts as I mentioned before). I achieve an increasing standard of living now while still getting some benefit of compounding, which increases my income, standard of living, and available cash for investing...

(If you haven't noticed, other than expenditures from the living category, and debt servicing, if any, all cash in my method eventually flows toward my investments, thus feeding the growing snowball...)

I think you see by now where this is going. Done right, I believe my method builds an ever-increasing income and standard of living, and my own experiences prove to me that this is the case. When I say "done right," however, I mean that, as there are several things that can derail this method: overspending in the living category increases debt; increased debt can lead to a situation where 20% of one's income is not enough to cover the payments, and having debt in the first place slows the growth of one's passive income; rash investment decisions can compromise your passive income stream and/or wipe out your capital, etc. This is no "autopilot" method; there needs to be an engaged human brain involved, a willingness to delay gratification, and patience.

Tuesday, October 14, 2008

I decided to post this bit about Quicken 2008 One Step Update because of a problem I managed to fix today. I figured it would be good to cast this line into cyberspace because Quicken absolutely lacks publicly available information that could lead one to the simple fix for this problem.

For a few weeks I have not been able to use One Step Update from within Quicken 2008 to download information from my various financial institutions. I kept getting various "OL" error codes - OL-221-A, OL-221-B, OL-254-B, etc. This was the case if I initiated an update from within Quicken or if I tried to download my info from a particular financial institution and import it into Quicken.

If you are experiencing this error and you use the Vidalia/Privoxy bundle with Tor and you have LAN settings set accordingly in Internet Explorer, or any LAN settings that route traffic through localhost, here is your solution: turn them off.

I don't recall exactly why I did it, but recently I shut down Vidalia (probably to speed up my computer's boot up sequence). I normally use Firefox, not IE, so when I shut down Vidalia I wasn't using IE anyway and I never thought to turn off the LAN settings within IE that are used with Vidalia/Privoxy. Without Vidalia active but with the LAN settings in place to route IE traffic through it, communication for IE dependent programs (which Quicken apparently is, along with a few of my spyware sweepers) is impossible. I think everything will still work if these LAN settings are active and Vidalia is active, but if the LAN settings for Vidalia are toggled without Vidalia being online, no dice.

I tried contacting Quicken tech support. Ultimately doing so led to the solution, but not because of any great advice they had. When it comes to this particular issue, there is basically no help available at all, and live tech support will only take you through a series of steps that do not address the problem.

What led to the solution was the tech I was chatting with directing me to go to Quicken.com from within Quicken. Quicken attempted to open an IE browser window which revealed that it was attempting to route through my inactive Vidalia client. That was the "ah ha!" moment. Before continuing to the next step the tech was expecting us to go through, I told him/her that I had solved the problem. I tried a few of my institutions, found everything working smoothly again, then explained the whole thing to the tech. That was that, I'm back in business, and Intuit (the makers of Quicken) were basically no help at all.

Judging by the Quicken user community forums, this could be a widespread problem for which Intuit is not offering much help. So if you are a frustrated Quicken user (this possibly would affect a wider range of Quicken versions than just 2008 Deluxe, the one I'm using) and if you use the Vidalia/Tor bundle, other anonymous surfing clients, or if you are behind a firewall, look there for a solution to this problem. Quicken tech support's various hoops to jump through - checking the system date and time, attempting to download into a new data file, etc. - all miss the mark by a long shot.

Friday, August 08, 2008

One of the key components of the specific job I do for my employer, a pest control company, is grow the business in my region. I spend a lot of time meeting with people in person doing this, and generally I have a lot of success this way (last I knew, all of the new monthly accounts our company gained last month were all generated by me). There's one major problem inherent to this sales approach, however: my finite being - I can only be in one place at one time!

For what I'm doing, and for business people in general, mass marketing is the way to go. The "conversion ratio" may be small (i.e. the number of individuals sent advertisements versus the number that respond), but the expense is worth it since you can essentially be more places at once. And getting a sale right away isn't necessarily important since your advertising efforts can at least notify people of the existence of your business, which later on can turn into a sale.

Custom Postcards are one way to go about doing this mass marketing stuff, and it is something that I might try. A colorful postcard briefly detailing the services one's business offers can find their way into a potential customer's notebook, stuck to the front of their refridgerator, etc. Then, when the need arises, your name and number are right there and probably easily remembered by the client.

Of course, this costs money, but you can save a little by using this coupon code at Vistaprint: PC50. This code is good for 50 free oversized postcards. Could you use fifty more customers? How about fifty more customers for the price of postage? I know I could, and the return on the investment would be astronomical!

Tuesday, February 12, 2008

Since everyone seems to have such a big problem with getting life saving information out of terrorists (who have no problem sawing people's heads off with kitchen knives) through a harmless interrogation method, waterboarding, I guess we could try this:

Sunday, February 10, 2008

Since mentioning in my last post about my forex trading that I'm thinking it's time to start moving some gains from that account into other investments, building a new dividend stock and bond portfolio is on my mind. I'm thinking 50/50 between the two asset classes and a set amount invested each month. I'm not sure yet if I want dividends to automatically reinvest or if I will take those as cash so I can direct them to what I consider better opportunities.

When it comes to bonds, I tend to stick to high yield stuff. One favorite of mine, HYB, is my usual pick. In my experience, this type of bond fund tracks the movements of stocks fairly closely, so you don't really get the stability that people usually buy bond funds for. However, these guys have been paying an uninterrupted dividend for 20+ years, and for as long as I've been aware of HYB (about five years now), it has been a consistent amount every month. So even though the fund may fluctuate in value quite a bit, it pays out a steady stream of cash that I can hold in the account to provide some stability (not to mention having more cash on hand to invest in opportunities that come up).

For the stocks, I want dividend payers. Specifically, I'm looking to select them from the S&P 500 Dividend Aristocrats list. The reason I'm focusing on those is that, amongst other things, the companies on that list must have at least a 25 year track record of uninterrupted dividend payments.

What I lack at this point in time though is a tool for determining which companies on that list have the highest rate of dividend growth. Some may have a higher relative yield right now, but I want the income from this portfolio to grow, so it's the companies that are actually making that happen that I'm truly interested in.

Saturday, February 02, 2008

Here's a new topic for my blog: the strange search engine queries that bring people here. Hence the play on words in the title, "Search Engine Queeries," because they're odd hits.

I got the idea to start posting these when I saw yet another search for today's example appear in my visitor tracking log. So then...

Search string:Death by helium

Reason it landed here: I post stuff from time to time on a site called Helium, the name of which I've included in post titles and tags as well as in the bodies of the related posts themselves. I earn a little money on Helium every month from the articles I've written and submitted, so when I've written something here that would fit well with the sort of content that is generally accepted on Helium, I duplicate it over there to increase my earnings on the piece in question. Sometimes my Pay Per Post articles work well as Helium submissions, so I make money through Pay Per Post, then earn residuals on the same work through Helium.

The article I wrote that seems to be behind this Search Engine Queery is one that is an argument in favor of the death penalty. Since I posted it to this blog with "Helium" in the title, and because "death" is also part of the title, it comes up when searching for "death by helium." You can check out the article by clicking here.

Now... I wonder who the people are that have been killing themselves with helium gas, because I've actually seen this search come in quite a bit lately.

Also, when they die, do they sound like shrieking munchkins?

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Email me at paul@paulezimmerman.com if you would like an invitation to join Helium and start earning money for your writing!